European Central Bank policy makers, and those that follow their actions, should be paying closer attention to whats happening in furniture or home-appliance stores across the eurozone.

At least, that appears to be the conclusion one could draw from reading a small contribution to the ECBs monthly bulletin, which was published Thursday. The article (here, pp. 65-67) notes that there is a particularly strong link between prices of a small number of goods and services and the output gap, which is the difference between an economys actual level of production and what it could make if it were firing on all cylinders.

The issue is important because the pace of underlying inflationin other words, price changes when volatile items such as food and energy are excludedis an important indicator for the ECB when it tracks inflation. While the headline, annual rate of inflation in the eurozone fell to the alarmingly low level of 0.3% in August, core inflationwhich excludes energy, food as well as alcohol and tobacco productsincreased to 0.9% from 0.8%. The ECB aims to keep headline inflation at just below 2% over the medium term.

Economists say that there is a correlation between the output gap and consumer-price inflation, though with a lag of about one year. When the economy is producing much less than it could, inflation is low, and when it is running closer to capacity, inflation is higher. But the bulletin says that only a few items have a statistically significant and positive link with the output gap. In fact, only about one-third of the items in the core inflation basket showed a link.

Some notable examples for non-energy industrial goods include furniture, carpets and household appliances, and for services items, package holidays, restaurant and caf services, and repair services for dwellings, the report said.

The article concludes that if one assumes that a turning point in the output gap took place late last year, then there should also be a turnaround in underlying inflation later this year. This should be discernible earlier in the sub-index ofitems that are responsive to the output gap.

Such a turnaround would be consistent with the inflation profile in the latest ECB staff projections, which envisage a gradual increase during the latter part of the year, says the report.

So if you are in a furniture store near Frankfurtor Madrid, Paris and Romein coming weeks, dont be surprised to find a hopeful-looking central banker checking out the price tags.

Link:
Eurozone Furniture Stores May Show First Signs of Inflation Pickup

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September 11, 2014 at 12:50 pm by Mr HomeBuilder
Category: Appliance Repair